Hail to the shale

Ancient North American rock is a treasure trove of oil and natural gas

Decades ago, geologists knew there were vast oil and natural gas resources locked in shale rock deep beneath the earth’s surface over much of North America. They just didn’t know that these hard-to-produce resources would one day become the pathway towards greater U.S. energy independence.

Shale is the underground source of a tremendous amount of the world’s oil and natural gas. Composed primarily of clay, quartz and organic material, shale is characterized by thin, parallel, horizontal layers. These layers are formed as cumulative deposits of sedimentary rock (sand, silt, mud, decaying plants and animals and other microorganisms) are compressed over long periods of time (millions of years), a process known as compaction. Compaction occurs when older sediments are covered by progressively younger sediments. Shale forms beneath bodies of very slow-moving water such as lakes, lagoons, river deltas and deeper portions of seas. Over time, these areas are not only compacted but also subjected to geologic forces that can uplift and bend them into layers of rock that reside on what is today dry land.

Petroleum & natural gas formation

Coal beds, sometimes called coal seams, are generally found at depths beneath aquifers but above most conventional oil and natural gas reservoirs. Coal beds contain methane, which is stored within the coal by a process called adsorption. It is in a near-liquid state inside the pores within the coal.

Oil and gas reservoirs can occur at any depth, and many drilling targets are reservoirs below 10,000 feet. The depth of organic materials and temperatures over time determine whether organic matter transforms into natural gas or oil. Anticline reservoirs slope downward on both sides from a common crest, and form as rocks are compressed by tectonic plate movement deep within the earth’s crust. The low density of gas and oil causes them to migrate to the highest parts of the folded rocky layers where they are trapped under a low-permeability rock layer. This would be one example of what geologists call “seals,” which effectively allow oil and gas to accumulate instead of escape upward.

Oil & gas reservoirs

Here’s a look at the various layers that make up oil and gas reservoirs. Oil and natural gas reservoirs generally lie far below the earth's surface, thousands of feet below freshwater aquifers. Aquifers are an underground layer of freshwater-bearing, permeable rock or gravel, sand or silt that can produce groundwater. These are usually found at depths above 1,000 feet; those closest to the surface are often used as a water source and for irrigation.

Anticline petroleum & natural gas trap

Source: Tortoise Capital Advisors

Geologic basins often have prospective reservoirs, including shales at several depths with different areal distributions. Oil and gas can be present in many of these layers. The specific portion of the basin that is actively being targeted, leased and drilled is called a “play” or “prospective trend.” Exploration and production companies use special drilling and formation stimulation (e.g., hydraulic fracturing) techniques to make shale reservoir production economically viable.

Conventional reservoirs are those with oil and/or gas trapped (or sealed) in moderate to high-quality reservoir rock. Given their low permeability, unconventional reservoirs also can serve as seals to conventional reservoirs.

Organic-rich shales have been all the rage in unconventional reservoir exploration and development. These rocks historically have been viewed as source rocks that generate oil and gas, which subsequently migrate into conventional reservoirs. Now shales are being viewed as reservoirs! Most of the shales being targeted in North America are found at depths of 7,000 to 14,000 feet – many thousands of feet below freshwater aquifers. Prospective shales contain large quantities of oil and/or gas that are locked into the rock’s very tiny pores. The rock itself is mostly impermeable, meaning the pores are not connected to one another, so the oil and gas do not flow easily out of the rock when it’s drilled. This tight rock makes it difficult for oil or gas to flow without the rock being stimulated in some way. Hydraulic fracturing is the most common method of stimulation used.

Source: Tortoise Capital Advisors

Organic-rich shales have been all the rage in unconventional reservoir exploration and development. These rocks historically have been viewed as source rocks that generate oil and gas, which subsequently migrates into conventional reservoirs.

Here, there, everywhere

To differentiate, conventional reservoirs contain oil and gas that may be extracted fairly easily and economically, using traditional drilling technologies. These reservoirs are generally smaller relative to unconventional reservoirs and harder to find, but can also be more prolific by many measures.

As source rocks for most oil and gas deposits, shale deposits are found all over the world. Geologists and petroleum engineers distinguish between proved, probable and possible based on certainty of their presence and ability to produce. “Proved reserves” refers to high-confidence reserves, which are commercially producible under existing economic, technological and regulatory conditions. “Probable reserves” may or may not to be economically producible, and “possible reserves” are less likely. Other terms, including “potentially recoverable resources” and “technically recoverable resources,” encompass broader assessments of what could prospectively be produced using far less-restrictive criteria. All of these measures of oil and gas have increased in scope in North America due to the demonstrated successful development of shale reservoirs.

Shale formations have become increasingly important as the domestic conventional oil supply has diminished and technological advances have provided economical methods for extracting oil and natural gas. Shale reservoirs are geographically expansive, generally covering far greater areas than conventionally produced reservoirs. The majority of geologic basins contain prospective shale formations, and a single shale play over tens of thousands of acres is not uncommon. In some cases, even entire states are considered prospective!

Hydrocarbon resource pyramid

As source rocks for most oil and gas deposits, shale deposits are found all over the world. Geologists and petroleum engineers distinguish between proved, probable and possible based on certainty of their presence and ability to produce.

Shale, deconstructed

Shale is brittle, and tends to shear or break along its many layers. Although typically gray or black in color, some shale is red, brown, yellow or green, which indicates higher concentrations of minerals such as ferric oxide or iron hydroxide. Even tiny amounts of these minerals can alter the overall color of the shale.

Bituminous shale is mostly black due to high concentrations of bitumen, a sticky, black liquid or semisolid form of petroleum. The black color comes from tiny particles of organic matter that were mixed with mud and ultimately turned into shale. As the mud was compressed and warmed within the earth, the organic material was transformed into oil and natural gas, which became trapped within the pore spaces of the shale or escaped into conventional reservoirs. Black shale may also contain kerogen, a solid form of hydrocarbons mixed in with the rock.

The Canadian oil sands also contain bitumen, which is mixed with loose sand or exists in partially consolidated sandstone along with sand, clay and water. The bitumen in the oil sands is so thick that it must be heated or diluted with lighter hydrocarbons to get it to flow. The Canadian oil sands are the largest tar sands in the world, and have only recently been counted among the world’s oil reserves, as advancing technologies have enabled commercially viable extraction and processing.

The Canadian oil sands also contain bitumen, which is a chunky black rock material that is mixed with loose sand and also exists in partially consolidated sandstone along with sand, clay and water.

Ramping up production

Over the course of the last decade, unconventional shale formations with vast oil and natural gas resources have been actively developed in Texas, including the Eagle Ford shale in South Texas, and a multitude of shales in the Permian basin in West Texas and southeastern New Mexico. Also of great significance are the Marcellus in the mid-Atlantic states, the enormous Bakken shale in North Dakota and Montana and expanding into Canada, and several others shown on the map below. The Bakken, Permian and Eagle Ford are primarily oil plays, while the Marcellus is primarily a natural gas play.

Major unconventional basins benefitting from technology

Source: Tortoise Capital Advisors

The natural gas resources contained in North American shale reservoirs are perhaps even more impressive. The U.S. has virtually achieved natural gas independence following success in several shale plays, including the Barnett shale near Ft. Worth, Texas, where the earliest work around hydraulic fracturing combined with horizontal drilling proved commercially viable. While production in the Barnett has leveled, the focus has shifted to Pennsylvania’s Marcellus shale. Gas production from the Marcellus and Utica has grown from virtually nothing to over 30% percent of domestic production.1

For perspective, consider that in 2005, gas produced unconventionally represented over 30% of U.S. natural gas production. In the past few years, unconventional gas production has comprised more than half of total U.S. natural gas production.

The production growth from both oil and natural gas has truly revolutionized the North American energy industry, and new energy breakthroughs are driving an economic boom in the U.S. Tapping North America’s vast oil and natural gas resources is providing a plethora of benefits, including jobs for millions of Americans and a boom in U.S. manufacturing, and is eliminating a significant portion of the energy trade deficit and placing America solidly on the path to increasing energy independence.

Hail to the shale, indeed.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. This material should not be relied upon as investment, tax or legal advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation.